Chinese electric vehicle stocks have faced multiple headwinds in the last few quarters. As a result, these stocks have witnessed a sharp correction.
XPeng (XPEV), which is possibly the best electric vehicle pick from China, has plunged by almost 55% in the last six-months.
I believe that the correction is a good opportunity to consider exposure to XPEV stock. While there are near-term drags on share prices, the long-term outlook for electric vehicles is robust. I am bullish on XPeng with healthy growth likely to sustain for the company in the next few years.
There are two primary factors for the stock’s recent pullback.
First, the global EV industry has faced chip shortage. Recently, supply chain issues in China have increased due to the surge in covid cases. Above all, raw material price inflation has the potential to impact margins.
Further, Chinese stocks have been under surveillance. XPeng is among the names that faces possible de-listing if regulatory compliances remain unmet.
Even with these factors, XPeng investors seem to have overreacted. The broad market correction has also contributed to the decline.
Growth Catalysts for XPeng
Xpeng has been reporting strong growth in vehicle deliveries. For 2021, the company reported delivery of 98,155 vehicles. On a year-on-year basis, deliveries surged by 263%. Even for Q1 2022, deliveries growth was 159% on a year-over-year basis.
However, deliveries declined in April 2022 on a month-over-month basis. The key reason has been a surge in COVID-19 cases in China, which has induced lockdowns and aggravated supply chain challenges.
Beyond this headwind, it’s likely that vehicle deliveries will accelerate.
The first reason is the continued launch of new models or upgraded versions of existing models. The mass-delivery of the P5 sedan commenced in October 2021. Prior to this, the mid-cycle facelift version of the G3 (G3i) started delivery in August 2021.
For the current year, XPeng has plans to commence delivery of its G9 model in the third quarter. The car will feature Xpeng’s Xpilot semi-autonomous driving system and lidar technology. The launches in late 2021 and in 2022 will ensure that vehicle deliveries remain robust through 2023.
Another reason to be bullish is the company’s aggressive expansion in Europe. In March 2022, XPeng started taking orders for its P5 model from Denmark, the Netherlands, Norway, and Sweden. As Europe looks to reduce dependence on Russia for gas, the EV market will gain traction. XPeng seems well positioned to benefit.
Strong Financial Profile
With XPeng having ambitious growth plans, the company’s financial flexibility is important to discuss. There are two key positives to note.
As of December 2021, XPeng reported $6.8 billion in cash and equivalents. The company seems fully financed for the next 12-24 months.
Vehicle margin for 2021 was 11.5%. On a year-over-year basis, vehicle margin expanded by 800 basis points. With operating leverage, further expansion in margin is likely.
On the flip-side, XPeng has continued to report negative operating cash flows. However, that’s unlikely to be a concern for the markets as long as vehicle deliveries remain robust. Tesla (TSLA) is a good case study on how cash flows can swell with operating leverage. XPeng is still at an early growth stage.
Focus on Innovation
With intensifying competition in the electric vehicle industry, innovation is likely to be a differentiating factor. Specific to XPeng, there are few positives.
As of December 2021, the company had 38% of employees involved in research and development. XPeng’s G9 will be the first model to be equipped with lidar technology and semi-autonomous driving features such as lane switching.
In October 2021, HT Aero, an affiliate of XPeng, indicated that the company will be rolling-out flying cars in 2024 that can also operate on roads. Clearly, the group is focused on innovation driven growth. This factor is likely to ensure that XPeng survives the intense market competition.
Wall Street’s Take
Turning to Wall Street, Xpeng has a Moderate Buy consensus rating based on nine Buys and one Hold rating assigned in the past three months. The average XPeng price target of $45.16 implies 97.9% upside potential.
Bottom Line
XPeng announced in August 2021 that the company will be increasing production capacity at its Zhaoqing manufacturing to 200,000 vehicles annually.
With new factories in Guangzhou and Wuhan, production capacity is expected to increase to over 400,000. The company has also indicated that it’s considering acquisitions to boost capacity. Therefore, XPeng is well positioned to cater to incremental demand in the coming years.
Given the strong cash buffer, the company has the financial resources to boost capacity and continue aggressive investments in R&D. Once the vehicle deliveries are significant in Europe, it would not be surprising to see the company pursue local manufacturing.
Overall, XPeng is likely to grow at a healthy pace with regional and international expansion. The company seems to be well positioned to navigate intense competition and gain market share. XPEV stock therefore looks like an attractive buy at current levels.
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